Wall Street senses recovery

August 8, 2009

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By , NEW YORK, Aug 8 – Wall Street has stretched its summer rally to four weeks amid increasing optimism about an end to recession, reinforced by data suggesting the economy has bottomed and is now strengthening.

The market has hit its best levels of the year, and analysts are hotly debating whether the runup can continue.

One key for investors in the coming week will be the message from Federal Reserve policymakers, who are unlikely to modify the near-zero interest rate policy, but could offer clues on recovery and the timing of any rate hike.

In the week to Friday, the Dow Jones Industrial Average of blue chips climbed 2.16 percent to 9,370.07, capping a four-week surge of 15 percent and reaching its best levels since last November.

The Standard & Poor\’s 500 index broke through the psychological barrier of 1,000 points, gaining 2.33 percent for the week to 1,010.48, marking a stunning gain of some 50 percent from lows hit in March for the broad-market index.

The sparkling gains come from a growing consensus that the recession is ending if not already over.

"Recent data reinforce our view that the US recession ended in June," said Dean Maki at Barclays Capital, which is calling for third-quarter US growth of 3.5 percent.

"We continue to expect a recovery that is stronger than the past two but not as robust as those that followed deep recessions in the past."

"The rally in equities has been nothing short of spectacular," said Avery Shenfeld at CIBC World Markets.

"In part, of course, it reflects the depths of the earlier sell-off … But more importantly, markets rallied, just as they fell, due to a dramatic change in risk aversion, combined with an unprecedented dose of monetary easing."

But Shenfeld said the market is "getting closer to the end of that source of equity momentum."

"The next leg of the rally has to come from earnings," he said. "Moderate economic growth and cost-cutting will leave room for progress on that front, but the market will become more selective as it looks for companies positioned for bottom line gains."

Others also suggest the market may have gone too far in light of a still-fragile economy.

"The rally in risky assets has gone from strength to strength — from relief that the worst is behind us to pricing in a \’V-for-Vigorous\’ recovery," says Manoj Pradhan, economist at Morgan Stanley.

But Pradhan said that "the painful adjustments to household and corporate balance sheets that are likely, given the excesses of the past, are enough to make the economic recovery a slow and tenuous one over the medium term."

Others contend that the market will be able to build on its rally as company earnings improve with the economy.

"The intermediate to longer-term trend of the major market indices from a technical perspective is up," said Fred Dickson at DA Davidson & Co.

"We continue to believe that market dips will be short and shallow as more investors focus on the possibility that the recession is finally coming to an end. Even a modest recovery should help boost corporate profits and hiring over the next 12 months."

Bonds were hammered on the shifting economic view. The yield on the 10-year Treasury note jumped to 3.854 percent from 3.501 percent a week earlier and that on the 30-year bond climbed to 4.603 percent from 4.311 percent. Bond yields and prices move in opposite directions.

The coming week\’s focus will be the two-day Federal Reserve meeting Tuesday and Wednesday. Additionally, investors will get data on the US trade balance, retail sales, consumer inflation and industrial production and quarterly results from retail giant Wal-Mart.